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I’ve been obsessively finding out Lilium (NASDAQ:LILM) for the previous few weeks. In this text, I’ll be outlining a number of observations in regards to the upside potential for Lilium that I feel are under-discussed or not instantly apparent. These observations, together with what I imagine to be robust potential that’s extra apparent, make me suppose that Lilium is undervalued at its present market cap, particularly when in comparison with these of Lilium’s friends.
Ferrovial Affect
Ferrovial committed $200 million to construct out a vertiport community in Florida in partnership with Lilium. Lilium will repay Ferrovial through landing fees. For Lilium to have that quantity of money dedicated to an vital piece of their technique, the infrastructure wanted to start out a short-haul and regional flight service within the US, means Lilium would not have to commit capital raised on the open market (previously or the longer term) for that exact initiative, they usually do not have to attend till they’re worthwhile to start out the B2C arm of their enterprise. In different phrases: I imagine the capital that Lilium has raised is undercounting an vital pocket of infrastructure funding. The proven fact that Ferrovial is taking up the development of the undertaking is icing on the cake and brings the timeline of a Florida vertiport community launch ahead in time. The AAM Infrastructure Index, a web site that “…assesses AAM infrastructure companies readiness towards the deployment of multiple vertiport networks all over the world in commercial operation, based on a proprietary tailor-made-for-the-infrastructure-market algorithm that uses publicly available information as well as expert knowledge” presently solely lists 5 corporations within the Advanced Air Mobility race. Ferrovial takes the primary spot. Notice, too, how a lot much less funding the opposite corporations on this listing have dedicated to their infrastructure initiatives. The second-ranked firm on this listing would not have a public funding quantity proven however seems to be planning just three vertiports throughout Italy and France in 2024. For reference, Ferrovial is partnering to develop more than ten vertiports in Florida in partnership with Lilium.
The Advantage Of Simplicity
Lilium’s jet is simple. That simplicity affords many benefits, however I’m particularly within the implications for manufacturing. I imagine a easy design affords Lilium worthwhile manufacturing velocity. My sense is that buyers are over-valuing the impression of attending to market first and undervaluing the impression of getting probably the most plane into the skies. Joby Aviation (JOBY) is making an attempt to deliver an plane to market that seems to me to have a extra difficult plane design than the Lilium jet, and but their market cap is about 4 occasions larger than Lilium’s. Lilium lately introduced that they’ve lowered the variety of engines and batteries of their seven-seater jet. From their Q1 shareholder letter:
“With a 10% increase in engine diameter, we were able to reduce the number of engines from 36 to 30, with nine now on each of the main wings, six on each of the forward canard wings. As noted in our last shareholder letter, this modification will simplify the design and reduce weight and cost, while providing even greater flight stability…”
Lilium managed to simplify additional an already easy jet design. At a time when inflation is a worldwide problem and supply chains are suffering severe bottlenecks, having a easy design to fabricate may show to be an important benefit that Lilium has over its competitors.
Diversity Of Potential Income Streams
Lilium has solid memorandums of understanding with a number of corporations who expressed curiosity in collectively shopping for lots of of Lilium’s jets and, in some circumstances, serving to Lilium to ascertain flight networks in several nations. A big (and rising) variety of events are located around the world. Their curiosity, in my view, represents a vote of confidence for the corporate and reduces the danger of relying on a smaller variety of near-term clients. Lilium can be pursuing a business model that would generate a various set of income streams by 1) promoting jets on to airways or small non-public operators, 2) beginning their very own flight service, and three) offering software program and components assist following jet gross sales to different corporations. Lilium is pursuing dual certification with EASA and the FAA, which affords the potential benefit of unlocking at launch a big space of the world by which to conduct enterprise. This international range affords yet one more layer of danger discount that different eVTOL corporations cannot fairly declare but: Lilium is not beholden to only one market and no matter financial situations are hooked up to that market. Lilium’s cabin is designed to be versatile, providing a premium cabin configuration, a regional shuttle configuration, and a cargo configuration. Each jet may have the flexibility to serve a various market. Consider the benefit this is able to have provided an organization when the pandemic compelled folks to remain residence. People prevented flying and turned to on-line purchasing, which meant there was immediately extra demand for cargo flights and fewer demand for passenger flights (source, pg 12).
Autonomous Flight Transition
In response to a query about autonomy throughout a gathering with the TBARTA board of administrators, Lilium’s Tassilo Wanner explained that the Lilium jet could be piloted at first however that the jets may ultimately be managed from the bottom the place one pilot would oversee a number of concurrent flights. As quickly as Lilium is ready to take the pilot out of the cockpit, they may concurrently deliver pilot prices down and develop income and margin potential. Lilium projects a pilot in a single jet will price 30 cents per air mile. Adding some stage of autonomy to the plane and placing even simply two flights underneath the purview of 1 pilot brings the pilot price down considerably. At the identical time, taking a pilot out of a jet opens up an additional seat. This will increase the common passengers-per-trip determine, which might drive down prices for shoppers or pad margin for Lilium. It’s price noting that the pilot is projected to characterize one of many largest prices to function a Lilium jet at launch. If Lilium can deliver the variety of flights underneath the management of 1 pilot as much as 5, they may have lowered the pilot price per mile for every flight all the way in which down to only 6 cents. The 24 cents per mile in financial savings can even go to padding margins or slicing the price of the service for purchasers. This is simply the intermediate stage between launching with a piloted jet and transferring to a completely autonomous plane, which might provide additional price financial savings. And that is to say nothing of the worth of not needing to seek out as many pilots to make sure Lilium’s service can proceed to ship passengers to the place they need and have to go.
Intelligent Charging
Energy prices are projected to account for about 6% of a Lilium jet’s operational prices. Because Lilium will likely be recharging their jets’ batteries frequently there may be potential for optimization. According to PSEG Long Island, “…energy production costs can range as much as 70% at different times of the day (peak, off-peak and super off-peak hours)…” With the numerous capability of their batteries, Lilium’s jets are every successfully giant power storage gadgets. Optimizing when the jets’ batteries are charged is, I think about, a comparatively easy alternative to decrease prices. If we think about, as an train, that Lilium may lower 70% off of their working power prices, I think they would cut back their cost-per-air-mile projection by round 4 cents. That won’t sound like lots, however Lilium’s number-crunching suggests a four-cent discount in working cost-per-air-mile would translate to greater than a full share level enchancment on margin.
Dual Certification Is Less Risky
Given that Lilium has ambitions to function all over the world, it strikes me as particularly sensible to pursue twin certification with EASA and the FAA. Even although it’s a bit more durable up entrance for Lilium to navigate the certification course of with two completely different companies, they gain from double counting a lot of their testing, they usually keep away from the danger that requirements will change between certification campaigns. While Lilium’s opponents may beat Lilium to 1 market, Lilium is positioned to be the primary eVTOL to notch certification with the 2 largest aviation certification regulators. Despite a big head begin in growth Joby will not doubtless be the primary to attain this feat, and but buyers nonetheless worth Joby at 4 occasions that of Lilium. Archer Aviation’s (ACHR) market cap is north of a billion {dollars}, regardless of a certification approach that, like Joby, is proscribed to the FAA. Even an organization like Eve Holding (EVEX), focusing on 2026 for his or her plane to be licensed through ANAC, is valued at a billion {dollars} extra than Lilium. Their firm is backed by Embraer and has secured numerous non-firm orders, however their plane concept has an unknown vary and cruise velocity and is projected to solely carry 4 passengers at launch. That assumes the idea is even viable to be licensed and mass-produced.
Low Infrastructure Cost And Environmental Implications
The quick turn-around time and exceptionally low cost to construct a vertiport community, in comparison with roads and railroads, make Lilium’s transportation pitches to regulatory authorities straightforward to greenlight. This impact is amplified when contemplating the appreciable CO2 emissions reductions Lilium jets provide. During a presentation to the TBARTA board of administrators, members from Lilium’s group laid out the benefits {that a} Lilium jet and vertiport community may provide Florida. I used to be inspired by how receptive the whole panel was to Lilium’s proposal. TBARTA Vice-Chair, Kathryn Starkey, said in the course of the query and reply part of the presentation, “I would say that we don’t want to take a long time with this if we want to be one of the leaders and innovators in the country on this exciting mode of transport. I do think we need to act quickly.” In different phrases, there may be early proof that among the friction that accompanies regulation is likely to be mitigated by the compelling and various worth propositions that Lilium affords.
Serious Battery Improvement Upside
According to Lilium’s Architecture Paper, “The main disadvantage of ducted fans is that because of the higher disc loading, as discussed above, the hover power is higher than for propeller aircraft.” That drawback is minimized as battery tech improves and flights begin masking bigger distances for the reason that hover section will account for a smaller share of the whole journey. Lilium may additionally select to scale back battery weight to make the identical short-haul flights they provide at launch extra economical. Better battery power density, projected to be materially larger over the approaching years, may permit the identical seven-seater Lilium jet (with upgraded batteries) to fly larger distances. The time financial savings for longer journeys make the worth proposition extra compelling since transition time at both finish of the journey would develop into a smaller share of the whole journey. Longer journeys would additionally open up extra income alternatives for Lilium. Based on knowledge from 2006, round 85% of all flights are short-haul flights underneath three hours lengthy. Even whereas lagging behind pre-pandemic income numbers, the worldwide business airline business is conservatively generating about $650 billion in income. If the next battery power density within the coming years permits Lilium to compete for 85% of the world’s flights, their present market cap of round $800 million would appear extra clearly like a compelling valuation to me. I need to take a minute to emphasise right here that Lilium’s superior unit economics, a operate of delivering a larger payload than their eVTOL peers over additional distances, positions them to make the most of this massive short-haul potential market in a manner that corporations like EHang (EH) or Volocopter cannot get pleasure from with out considerably redesigning their preliminary plane. If you suppose battery tech enhancements are too far out into the longer term to be considering at this stage, consider that BloombergNEF’s Head of Advanced Transport stated, “Battery energy densities keep getting better. They’ve almost tripled at the cell level since 2010.” Lilium is launching with a jet that can fly for about an hour. I imagine that batteries which might be twice as power dense because the batteries Lilium will use at launch provide extra than double the vary enhance potential to Lilium. Remember, the impression of energy-expensive take-offs and landings is averaged decrease the additional Lilium jets fly in a single mission. Consider, too, that Lilium can hold its acknowledged battery reserves fastened and put extra of the upgraded power density in future batteries immediately into the jet’s vary. One manner to consider this dynamic: Lilium affords compelling publicity to future battery tech enhancements.
Small Footprint Advantage
Lilium has made it clear that one of many benefits of the electrical jet know-how they’re growing is that they can scale up their jet design without having a considerably bigger take-off and touchdown space. This is a operate of their ducted fan strategy and is in sharp distinction to open propeller plane. I imagine it is vital to emphasise right here that infrastructure is not straightforward to vary. Lilium will not need to rethink its infrastructure strategy or rebuild present vertiports in the event that they need to scale up its jet design sooner or later. All of the opposite corporations who’re vying for the enterprise to shopper mannequin for his or her eVTOLs might want to think about this. Open propeller designs will not have as straightforward a time scaling up in comparison with Lilium and may very well be restricted to taking smaller payloads at the same time as battery tech improves.
Don’t Forget About The Flight Models
Some folks have suggested that Lilium won’t have the tech they are saying they do as a result of they have not demonstrated it in the actual world. I feel this overlooks Lilium’s proprietary flight fashions, which the team has guided to be exceptionally good at predicting real-world flight conduct. Watching how easily Lilium’s know-how demonstrator achieves main wing attachment helps the corporate’s claims in regards to the accuracy of their simulators in my view. I am unable to think about that Lilium could be pursuing twin certification and handle to retain such a high-caliber team with no viable product. I feel it is affordable to imagine that Lilium’s extremely correct flight-testing simulators have modeled transition for the entire plane already, together with the canard and the physique, and that they’ve modeled all kinds of flight situations for the seven-seater they plan to deliver to market that the world has not but seen footage of in flight.
Risks
Lilium just isn’t a play for the faint of coronary heart. Lilium shares may lose worth quickly if the corporate sustains a jet crash, fails to attain certification, or runs out of money earlier than turning a revenue. With the financial system, inflation, and provide chains on edge, Lilium may have substantial hurdles to deal with as they push towards certification. Even if its jet achieves certification, the corporate nonetheless has to show its enterprise mannequin. Lilium just isn’t producing income but, so we will solely speculate what its enterprise will seem like sooner or later.
Conclusion
It’s laborious to worth an unproven start-up that’s burning money quick and is on the mercy of the certification course of, however I hold coming again to the potential alternative within the rising “advanced air mobility” sector that, in response to the bottom case of a group from Morgan Stanley, is projected to account for round 5 or 6 p.c of the world’s GDP by 2050 (source, pg 32). The dangers that Lilium is dealing with within the close to time period, particularly certification uncertainty, public and regulatory acceptance, and competitors, all appear from my perspective to be considerably overblown. Lilium is transferring rigorously and strategically by way of the certification process with a seasoned team, regulatory bodies and the general public (pg 61) have proven early indicators of embracing eVTOL know-how, and Lilium’s jet design differentiates the corporate from different eVTOL corporations that I feel buyers are unwisely clumping along with Lilium. Lilium’s market-entry plane initiatives to fly a larger payload additional than its competitors. I do not suppose buyers are precisely accounting for the benefit that opens as much as Lilium. Their jets stand to show Lilium to a bigger share of the big TAM that Morgan Stanley is projecting over the approaching a long time. Lilium may show to be in a category of its personal within the superior air mobility sector and I imagine that, in comparison with different corporations vying for a seat on the AAM desk, Lilium’s valuation would not but replicate the bigger market share its know-how exposes them to.